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Lending Cycles

Listed author(s):
  • Patrick K. Asea
  • S. Brock Blomberg

We investigate the lending behavior of banks by exploiting a rich panel dataset on the contract terms of approximately two million commercial and industrial loans granted by 580 banks between 1977-1993. Using a Markov switching panel model we demonstrate that banks change their lending standards from tightness to laxity systematically over the cycle. We then use an efficient minimum chi-square estimator to examine the relationship between the cyclical component of aggregate unemployment and bank lending standards when both variables are jointly endogenously determined in a system of simultaneous equations with mixed, continuous/discrete dependent variables. The patterns we uncover suggest that lax lending standards that tend to occur during expansions exert considerable influence on the dynamics of aggregate fluctuations.

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File URL: http://www.nber.org/papers/w5951.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5951.

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Date of creation: Mar 1997
Publication status: published as Asea, Patrick K. & Blomberg, Brock, 1998. "Lending cycles," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 89-128.
Handle: RePEc:nbr:nberwo:5951
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